Oil costs fuel inflation rise

INFLATION soared during November on the back of increased household spending and strong demand for budget flights.

Office of National Statistics figures revealed a 1.5% rise during the month, the highest level for five months and 0.2% higher than in October. Analysts had predicted a rate of just 1.3%.

The figure throws doubt on whether the Bank of England’s five interest rate hikes have cooled consumer spending and points to further rate increases.

Inflation still remains considerably below its 2% target, but nevertheless the latest figures show that it is on the rise and may keep alive speculation that the Bank will have to raise rates again.

The ONS said seasonal cuts in airfares were weaker than a year ago as airlines were finding it easier to fill their planes. Carriers have also been pegging prices high to cover the rising cost of oil during the second half of the year.

The high cost of fuel also contributed to an increase in household bills, with the major gas and electricity suppliers raising tariffs during September and October.

Escalating food prices and demand for miscellaneous goods, such as jewellery, added to the inflation rate.

Mark Miller, economist at HBOS, expects the Bank to wait for further inflation figures before making a decision on interest rates.

He said: 'The real test will come next year and the extent to which strong producer prices and wage pressure start to feed through into CPI - that's the key thing as far as monetary policy is concerned.'

Gerrard chief economist Simon Rubinsohn said: 'Our suspicion is that inflation will remain close to its current level during the first quarter of 2005 despite the recent drop in petrol prices. This would keep it ahead of the central expectation agreed by the MPC.
'Even so, policy will remain on hold for some time to come. We believe that the risks to the interest rate environment are skewed on the upside.'